U.S. sues BofA over mortgage-backed securities

E. Scott Reckard

In twin securities-fraud lawsuits against Bank of America Corp., the federal government is accusing the nation's second-largest lender of lying to investors about supposedly prime loans that more closely resembled subprime "liar loans."

The civil suits, filed Tuesday by the Justice Department and Securities and Exchange Commission, focus on $850 million in mortgage-backed securities that BofA issued in 2008. The mortgage bonds included so-called Paper Saver loans that required little documentation of a borrower's income or ability to pay.

The suits are the latest in a long string of government and private mortgage-related civil actions targeting banks. BofA has drawn more than usual attention from investigators because of the liability it inherited in 2008 when it bought enormous subprime lender Countrywide Financial Corp. of Calabasas.

But the new Justice Department and SEC actions do not involve Countrywide, instead accusing Bank of America itself of wrongdoing. In another unusual twist, they focus on jumbo mortgages — the outsized home loans designed for wealthy borrowers.

The investors in the mortgage securities included the Federal Home Loan Bank of San Francisco and Wachovia Bank, the East Coast giant that was taken over by Wells Fargo & Co. as it teetered near collapse. The SEC said losses to investors so far total about $70 million and may reach $120 million.

The Justice Department said BofA made most of the jumbo loans through mortgage brokers — and without telling investors that the underlying loans were defaulting at high rates. BofA no longer makes mortgages through third parties.

Despite the affluent clientele for jumbo mortgages, about 15% of the loans included in the mortgage bonds resembled the subprime "liar loans" that led to so many defaults, the Justice Department alleged in the suit. The Paper Saver mortgages were made to self-employed borrowers without bank verification of their income or assets, it said. The bank never disclosed the percentage of these risky loans to investors, the suit alleges.

"As Defendants knew, mortgages given to self-employed borrowers were more risky than mortgages given to salaried borrowers, and stated income/stated assets mortgages given to self-employed borrowers were even riskier," the lawsuit said.

The Justice Department lawsuit alleged violations of a 1989 law that enables the government to seek hefty civil penalties. It said that in addition to other problems, BofA violated its own underwriting standards in issuing the loans and did not properly investigate the mortgages when it bundled them to back the securities.

In a statement, Bank of America blamed the housing market collapse for defaults in the pool of loans backing the bonds. It said they had performed better than similar bundled loans from that era. The bank maintained that it would show the bonds were bought by "sophisticated investors who had ample access to the underlying data" — but presumably didn't bother investigating.

In an interview with The Times last week, BofA Chief Executive Brian Moynihan declined to comment on the government probes but called attention to the long series of mortgage-related legal agreements that already have cost the bank more than $40 billion.

"We've settled and put a lot of stuff behind us," he said.

The lawsuits underscore how the banking industry continues to battle fallout from the mortgage meltdown, which took hold in 2007 and triggered the global financial crisis.

The Swiss bank UBS, which last month reached an $885-million settlement with regulators over mortgage securities sold to mortgage finance giants Fannie Mae and Freddie Mac, said Tuesday that it would pay an additional $50 million to settle SEC charges that it misled investors in a mortgage-bond offering.

Bank of America had said in a securities filing last week that it expected Justice Department and SEC lawsuits involving jumbo loans. It also said the SEC might file civil charges related to complex securities called collateralized debt obligations, which were issued by BofA's Merrill Lynch unit. And it said staffers at the New York attorney general's office intend to recommend filing a separate civil action against Merrill Lynch related to mortgage securities.

Atty. Gen. Eric H. Holder Jr. said the Bank of America case was investigated by a fraud task force composed of the Justice Department, SEC, FBI, 10 U.S. attorney's offices, other federal agencies and state attorneys general. He said the task force would "pursue a range of additional investigations."